Take Flight With an Iron Condor on Gold

by John Kmiecik | January 18, 2013 9:04 am

Take Flight With an Iron Condor on Gold

Some option strategies have rather imposing names, like “iron condor.” But if you break down this strategy, it comprises two simpler strategies. Here’s an iron condor trade idea that really is just two credit spreads.

SPDR Gold Shares (NYSE:GLD [1]– $163.35): Iron Condor

The trade: Sell February 168/170 call credit spread (selling the February 168 call and buying the February 170 call), and sell February 156/158 put credit spread (selling the February 158 put and buying the February 156 put) for 55 cents or better.

The strategy: The maximum potential profit for this trade is 55 cents if GLD is trading between $158 and $168 at February expiration. All of the options would expire worthless. The maximum loss is $1.45 ($2 – 55 cents) if GLD is trading below $156 or above $170 at February expiration. Breakeven is $157.45 and $168.55 at February expiration based on a credit of 55 cents.

The rationale: Gold prices are back in the news recently, especially with the state of the U.S. economy. In general, positive economic reports usually push gold prices lower and vice-versa. Lately, gold has been moving higher, but positive economic news like an improving housing market may move investors out of gold.

Click to EnlargeTaking a look at the chart, the stock has been trading in a range for a couple of months, and it’s currently right about in the middle of the iron condor range. The GLD ETF has resistance at the $168 level, even though it has moved through that point a few times, and it has very strong support at $158, which the ETF hasn’t been below since August of last year.

The implied volatility of the options is slightly elevated, which means they’re a little overpriced and an advantage to sell like in this iron condor. GLD will probably make some volatile moves over the next month, but if support and resistance can keep the ETF from breaking higher and lower, this iron condor will really soar to the land of profits.

As of this writing, John Kmiecik didn’t own any securities mentioned here.